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03/21/2010

Greece’s Economic Crisis—Posner

I’ll describe the crisis briefly, then address two questions: whether the nations of the European Union, such as Germany, should try to bail out Greece; and what the Greek crisis tells us about what is in store for the United States.

In the easy-money years of the early 2000s—for which we have Alan Greenspan, other central bankers, and President Bush and his foreign counterparts to thank—the Greek government borrowed a great deal of money from banks, mainly in Europe, to fund its huge public sector. Greece has chronic difficulty in funding its government expenditures out of tax revenues because of rampant tax evasion. And its bureaucracy appears to be either corrupt or incompetent or (probably) both, and as a result its published financial data are inaccurate and misled and continue to mislead lenders. The global downturn, which has driven up unemployment in Greece (to 10 percent) as elsewhere, has weakened the Greek economy further, but what has precipitated the country into de facto bankruptcy is the realization by lenders that Greece, like so many other countries, is dangerously overindebted. Its national debt, most of it owed to foreigners, of some $400 billion is greater than its Gross Domestic Product, and its current annual budget deficit is almost 13 percent of GDP, which means that its indebtedness is growing rapidly. Greece like other borrowers has to roll over its debt continuously. In 2010 it will have to replace some $65 billion in public debt, and fear of default has driven up the interest rate on new Greek government debt to 6 percent.

The Greek government has taken drastic-seeming measures to reduce its deficit. It has imposed new excise taxes and increased existing ones, reduced wages and pensions of government employees and increased their retirement age, and reduced public services. Greece has a huge public sector—40 percent of GDP is generated by the public sector, and 25 percent of Greek workers are public employees—and so the government can effectuate big reductions in public spending virtually by a stroke of the pen, though not without inciting riots.

Despite the measures taken by the government, it is desperately seeking financial aid from EU countries or failing that the International Monetary Fund: that is, it wants to borrow more money, and at lower interest rates than are available from private lenders, in order to avoid defaulting on its public debt or, alternatively, reducing government spending even more sharply than it is doing, with potentially serious political consequences.

Assuming that the Greek government, without foreign assistance, cannot avoid defaulting on its public debt because it has reached the limits of what the Greek people will acccept in the way of austerity measures imposed by their government, there is not much difference between a default on the one hand and borrowing—whether from EU countries or from the IMF on what undoubtedly would be onerous terms—on the other hand. Either way, Greece will be broke. Default would be the cleaner and simpler solution. A cascade effect from a Greek default can be avoided by EU nations’ bailing out any creditors of Greece whose failure, because of a Greek default, would have macroeconomic significance.

Default would be a wake-up call for the Greek nation and put it on the path to competent economic management. A bail out of Greece would be administratively complex. The Greek government would try, for compelling domestic political reasons, to substitute bail out money for cuts in spending and tax increases, and the bailers out, whether EU nations or the IMF, would struggle to prevent the substitution.

Comparisons are being drawn between Greece and the United States. Our national debt of $12.5 trillion is approaching our GDP of about $14.5 trillion and will probably exceed it within the next couple of years, as the debt seems likely to grow by about $1.5 trillion for several years to come, especially with the enactment of the health care bill and the spur that that enactment will impart to other spending programs. Our annual federal budget deficit is now more than 10 percent of GDP. We do not have the same tax-evasion problem as Greece, but we have low taxes and intense resistance to either raising them or reforming the tax system to obtain more revenue with less economic distortion. Our public finances are transparent, so we will not slide into national bankruptcy inadvertently. But we seem incapable either of cutting existing public spending or avoiding costly new public-spending programs.

What we have sustaining us is the status of the U.S. dollar as the major international reserve currency (plus the fact that, since our debt is in dollars, we can reduce it by inflation, though not without cost; Greece can’t do that because it doesn’t have its own currency). Many international transactions are in dollars even when the transacting parties have no American connection. (There are other reserve currencies, mainly the Euro and the Yen, but the U.S. dollar accounts for about two-thirds of the world’s total reserve currency.) If a Saudi Arabian oil company sells oil to Singapore, the sale will be in dollars, and this will require the central bank of Singapore to hold dollar reserves that it can exchange with Singaporean merchants for the local currency to enable those merchants to make purchases in dollars. With the world’s central banks awash with dollars—and for the further reason that many foreign countries, such as China, Japan, Germany, and the oil-producing countries of the Middle East, export much more to the United States than they import from us and as a result accumulate large dollar balances—the United States can easily borrow to finance its public debt. Greece doesn’t have its own currency, and so is in the approximate position of a private borrower.

This happy situation will enable us to avoid defaulting on our enormous public debt for the foreseeable future. But it will perpetuate our fiscal improvidence.

Comments

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We will never default because we can always print more dollars to pay off debts. But the question remains, what happens when most debt buyers believe we are at the point when inflation is the only alternative to default? Does economic theory have anything to say about this, or will it occur, as Niall Ferguson predicts, totally out of the blue and without any warning whatsoever? When do we come to the end of Happy Ever After Stories?

"Our national debt of $12.5 trillion is approaching our GDP of about $14.5 trillion and will probably exceed it within the next couple of years, as the debt seems likely to grow by about $1.5 trillion for several years to come, especially with the enactment of the health care bill and the spur that that enactment will impart to other spending programs."

........ Hmmmm, CBO report indicates that while the H/C bill will cost $940 billion over ten years, the deficits over that period would be reduced by $138 billion..... leaving an $80 billion annual cost.

The Medicare Prescription Drug plan costs an estimated "As of February 2009, the projected net cost of the program over the 2006 to 2015 period was $549.2 billion." $55 billion/year and was pushed through with lot's of arm-twisting and a long delayed midnight vote with little fanfare despite paying retail prices to drug manufacturers. The VA that is "allowed" to shop within our borders pays something less than half what Medicare D pays and they sell at similar discounts to other nations that supply all of their citizens.

As drug mfgs have some of the most profitable bottom lines of any of our industries how about pruning them back? Would it really "starve research?" (In fact they spend more on advertising than on research) I suspect markets being what they are, if they were deriving lesser gross margins in the US they'd have to raise prices in the rest of the world. Kinda the H/C systems of other advanced nations chip in on research and advertising?

One example: Two guys take reflux meds, one through a government funded insurance program that buys a popular, heavily advertised brand for him, the other gets a choice of several equally effective generics from the VA at one fifth the cost.

Oh........ one more! Can't resist: There is a drug for adult acne problems, and for years it was a pill taken twice a day for something less than a buck a day. Now they've a once a day pill that costs some 10 times as much. Well, the insurance guys have caught on to that, so instead of a $7 copay on the cheap one they charge something like $30 or so on the more costly one. Ha! the drug merchants see to it that dermatologists have lots of $30 coupons for their patients. Good biz, eh? as their $30/month turns into $300/month less the coupon cost........ and maybe a trip to the Bahamas for the prescribing docs?

If we're really sick of it (pun intended) there is lot's more room for cost containment!

Unless economic principles have suddenly been suspended, micro and macro economics merge at some point of debt, loss of confidence, insolvency and social adjustment to the work incentive-taxation axis. To think that Greece is an insignificant lesson and that the US can stay on its present profligiate course without very unpleasant consequences is a fairy tale. According to the Tax Foundation, in 2008 38% of tax filers in the US paid NO federal income tax. The top 2% of income earners paid 75-80% of all federal income taxes. The tax revenue will continue to go down, the US will have to monetize its debt, the standard of living will continue to deteriorate and the dollar will lose its reserve status. Maybe we should offer to take the place of Greece in the EU.

"According to the Tax Foundation, in 2008 38% of tax filers in the US paid NO federal income tax. The top 2% of income earners paid 75-80% of all federal income taxes."

Jim: Yep; I often post about the soaring income inequality that leaves your 38% (and more) too poor to pay contribute anything to the IRS, not good for SS contributions either.

As for the amount of tax paid by the topmost 2% since our tax tables are not very progressive, since Bush decided there was some magic in 33% being the top rate despite the massive gains in income of that top 2% not shared with 90% of the rest of our workforce, your tax numbers simply serve to highlight the share of income of that top 2%.

I suppose there's some wry humor to be found in "conservatives" having cut taxes w/o corresponding spending cuts since the beginning of the Reagan administration that was a major factor in piling up this massive debt which will eventually require more onerous taxation than was the case before the cuts and will probably force constraints on future military budgets too.

Now considering who got the breaks and the rapidly rising income inequality, who do you think we should tax?

Starting at some "reasonable" income level, I support a flat tax of 17%, no deductions, no exceptions. I don't know what the base income level should be but I would think something around 75,000 would be about right. It doesn't matter what I think though because a national VAT is next and that will hit the low income people the hardest. There just aren't enough fat cats to fund the US profligacy and waste without hurting the middle class.

But we are doing something about employment, Jack. The IRS is going to hire 19,000 new agents to track down medical insurance derelicts and that is only going to cost 10 billion. Ah, job creation. All that class warfare stuff does is to destroy the upper classes and the lowere classes as well. Boy, then we will all be happy. Might I suggest that you read Aristotle's "Politics" chapter 5. He was a long time astute oberver of class warfare policies in multiple Greek city states and its effect on those societies.

Jim: Thanks, and maybe politics is your calling. Since median household income is $50k and individual incomes lower yet, your plan should be popular with most. At the top end you'd could easily finance your campaign with max donations from those of even the $75k and up level who'd be greatly relieved by your gift of halving their taxes.

Trouble is we spend on the order of 20% of our entire GDP, an amount made a couple percent higher due to having to service the debt built up by those who gleefully cut taxes but either didn't cut spending or set spending records of their own as did the incoming Bush Admin with full acceptance by the GOP dominated Congress in 2001 before any of the war costs came rolling in. In short you'd take the title for largest deficits in history.

I'd agree that large deficits after 2001 would have been a problem even if Bush had stayed with the tax tables of the Clinton era, but the annual deficits would have been something like $200 - $300 billion smaller each year with something like $2 trillion less debt today.

Some economists might want to claim the tax cuts and related deficits gave the economy a needed and well targeted Keynesian spurring that justified the increased debt but I think they'd have a tough time making an honest case and especially so if they were to have to account for the fix we're in now of nearing maximum debt with the need for spurring through public spending.

AS for "class warfare", not sure if you looked at the graphs, but they show that such "war" has been won hands down by the topmost few percent with some benefits accruing to upper income earners along with zipnada for the "lower classes" from median to bottom. And, the troubling trend continues. Not sure why "conservatives" favor such trend but it will not serve the best interests of what we think of as America and adds to the problems of SS and Medicare solvency. BTW did you know we've fallen to nearly dead last in upward mobility of advanced nations?

The number of new IRS agents required for H/C compliance sounds like the stuff of talk radio cheerleaders, but you do bring up an interesting topic.

Just today I heard on a call-in show a "young, healthy, landscaper" who plans to pay the small penalty rather than join the H/C plan. Interesting; and I'll bet he pays, perhaps mandatory, auto insurance against the relatively small risk of causing or being the victim of a costly auto accident.

Do you think the "young-healthies" have accurately assessed their risk of injury from motorcycles, skiing, etc. or that of an early bout with a costly illness, or how they'd deal with it? Does their rejection fit well with conservative principles of accountability and individual responsibility?

Well I'm afield of the "Greece" problem, but if we are to avoid their fate deal with our most costly problems in a rational cost-containing manner. Consider: Since H/C has grown to take about the same share of GDP as does all federal expenditures that a 2% increase in H/C is just as bad for the individual and for the economy as a 2% increase in taxes.

I don't think that I could do much worse than the bozos who have held power for the last 50 years and being from Illinois makes me feel even more confident of that thought. Can I count on your vote?
It seems to me that the first thought of any good public official is to not spend a penny if not absolutely necessary and to encourage all of those capable to be as independent as possible. BTW, I am not interested in worrying about those who have more money than I do, only to live my own life in an honorable and productive way and to help those in need when the opportunity arises and I am able to do so without destroying my own life or the lives of my loved ones. Just because Bush was careless doesn't justify others in their carelessness. I am quite sure that the Greek government had good intentions while overspending but as you know, the road to hell is paved......... Whom do think was hurt more by the Greek stupidity, the rich or the poor?

Jim: Sorry, you won't get my vote, but might get one from Steve Forbes who spent $100 million of his inherited wealth trying to sell an equally unrealistic "flat tax" w/o ever divulging, or seemingly being concerned about the details.

Hope you've not been all that unhappy over the last half century and would urge you to google up a US budget and see what you can cut out of it, though I'd warn you that about the only chunks big enough to withstand cuts that would make a difference would be the military and payments on the D E B T built up during 30 years of failed "Laffer Curve" experimentation. BTW absent the debt service our Fed budget is not much higher in terms of GDP percentage than it was 30 years ago.

As an individual it's admirable to want to be independent and not "worry" about those having higher incomes or more wealth, but the concern here is that of how to make our mixed, capitalist economy continue to work............... for us. So a few questions about its functionality:

CEO "compensation" has soared ten-fold since 1980; do you think management talent has become so scarce as to be the reason?

Min wage has fallen and those from median incomes down have made hardly any purchasing power gains despite a doubling of productivity. Do you think "the market" is accurately reflecting their contribution? Those of the CEO group?

What happens to our society when "38% pay no income tax at all" and in fact have to draw upon government subsidies in order to have even the most basic std of living?

What happens to your home town when there are too many "Walmart" employees? (Who benefit from a billion in govvie subsidies each year) Who helps to pay for your schools, police, fire and other local costs when there are too few of middle incomes and too many of such low wages that they can not contribute?

And a few more on "not spending unless absolutely necessary".

The deficits of recent years have been far too high and we really must learn that when we "throw a war" that "Supporting it" means more than a cheap decal and we have to pay for it, and that the "Laffer Curve" is laughable unless accompanied by the spine to make corresponding spending cuts.

Still, as deficit mania sets in, (a few decades late) we should understand that zero is probably not the right number as a society, like a young family or growing company, will find the need to borrow from the future for infrastructure, defense, schools etc. and pay for them as they are used.

As for trying to cut enough to put current spending back in proportion now, that would dramatically increase unemployment and plunge us into a deep depression. Again, much like that young family or growing company, while we do need to watch spending the ONLY way out is growing the economy and bringing in more revenue.

"In the easy-money years of the early 2000s—for which we have Alan Greenspan, other central bankers, and President Bush and his foreign counterparts to thank"

Do you actually believe this? Do you not hold the democrats responsible in any way for the way they have consistently pushed spending up by not only demagoguing any lowering of the increase in spending as an unconscionable cut and an assault on the poor, or sick, or the old or "the children"or union members or all of them together!!

Do you not remember Dodd and Frank insisting that all was well with fannie and freddie and what we needed was to increase home ownership amongst the "disadvantaged"?

Do you not realize that the democrats have voted for virtually any increase in federal spending and that they constantly complained about how stingy that spendthrift Bush was?

I agree we are being very poorly served by our "elites" but it is not just Bush and the republicans that have failed the country it is all of us. We voters have fallen down on the job as well. We continue to want the goodies and we elect mostly those who will provide them. I fear we will not learn the lessons of fiscal conservatism so well known to our fathers until we suffer the ugly consequences of profligacy.

The so-called EU “bailout” deal for Greece just announced is ridiculous. Greece must exit the eurozone, devalue the drachma, restructure its debt and borrow from the IMF at 3.5% interest, if needed, instead of at 6% from the markets or from its eurozone “partners”.

Whether there is in fact any point remaining in the EU at all is a valid question. Because it is well established in economic theory that a monetary and trade union increases the divergences in competitiveness, and this is the root of the problem. Because intra-EU imbalances and structural weaknesses are now too evident. And because, without solidarity, the EU is kaput.

This is the best course of action for all the GISPI (Greece, Italy, Spain, Portugal, Ireland). Let the FUKD (or FUKDE, as Edward Hugh has called them, i.e. France, UK, Deutchland ) keep the EU for themselves. Sorry UK, you're not to blame. You did the right thing staying out of the euro.

And let the Germans sell an island (in the North Sea) and a monument (as they have suggested to the Greeks), because they are also now above the 3% deficit-to-GDP ratio. Did I say German monument? What monument???

Now how can Europe, which owes even its name to Greece, exist without Greece, that's another question.

Apart from the so-called "moral hazard" in helping Greece, there is also a moral deficit in the EU…

for the further http://www.new-jerseys.com reason that many foreign countries, such as China, Japan, Germany, and the oil-producing countries of the Middle East, export much more to the United States than they import from us and as a result accumulate large dollar balances—the United States can easily borrow to finance its public debt. Greece doesn’t have its own currency, and so is in the approximate position of a private borrowe

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.

Time the dutch stopped keping silent and opened their mouths.That internet traffic is routed through Holland and all traffic monitored by them shows how cunning and manipulative this lot are .They bought rats to England in the 1600s in textiles.The Dutch are the richest nation in Europe and despite defending them in two world wars they are conspicuosly quiet on aiding the Euro.Hope they get what they deserve.

The Greek debt crisis virus is prone to be infecting the eurozone leading to fears that the crisis will spread to other eurozone nations like Spain, Poratugal, Italy or Ireland. Engineered by the same financial group involved in provoking the US supprime mortgage crisis, chances stand that the Greek debt crisis has a big potential to destabilize the EU but also to kick back to the US economy as well ... The world economies and finances are so interconnected within the global economy, that it became literally impossible for a financial shock like the one in Greece to remain without consequences for the other (remote) countries as well ...
Stay tunes for what will happen next, and how EU will decide to go about it - the issue might reveal some interesting aspects and connections

1. Separate the Social Security Trust Fund so that the deduction is an investment not a tax - this increases the debt.
2. Put a $1-$2/gallon tax on gasoline.
3. Legalize Marijuana with a 10% sales tax.
4. Abolish refundable credits that make the IRS a welfare organization.
5. Reduce Congress pay and fringe benefits to equal major's pay in military. Abolish Congress's pension and medical coverage to be replaced with social security and medicare. Make all expense reimbursement fully taxable income.
6. Per Obama close loophole permitting hedge fund managers to treat income at lowest capital gains rate.
7. Tighten up 'anti dumping' legislation and impose penal import duties on foreign companies that 'dump'.
6. Require approval of both houses before attacking another nation. Funding for this war should require the approval of 2/3 of each house.
7. Close down all off shore military bases. Reduce military budget accordingly.
8. Restate the 10th Amendment so that it is not rendered useless by the 14th.
9. Require the Federal budget to be balanced and current debt to be paid off or 'consolidated'. In the event that the budget projections are not met, all members of Congress and the President should seek reelection.
10. Require IRS to reduce staff by 25% submitting the changes to the tax code necessary for this to be possible.
11. Payment for all regulatory authorities to be funded by licenses paid for by those entities being regulated. Those regulatory bodies should be independently appointed.

Unless economic principles have suddenly been suspended, micro and macro economics merge at some point of debt, loss of confidence, insolvency and social adjustment to the work incentive-taxation axis. To think that Greece is an insignificant lesson and that the US can stay on its present profligiate course without very unpleasant consequences is a fairy tale. According to the Tax Foundation, in 2008 38% of tax filers in the US paid NO federal income tax. The top 2% of income earners paid 75-80% of all federal income taxes. The tax revenue will continue to go down, the US will have to monetize its debt, the standard of living will continue to deteriorate and the dollar will lose its reserve status. Maybe we should offer to take the place of Greece in the EU.